European Standing Committee B

Wednesday 9 January 2002

[Miss Ann Widdecombe in the Chair]

Broad Economic Policy Guidelines

10.30 am

The Chairman: Before I call the Minister to make an opening statement, I remind the Committee that pagers and mobile telephones should be functioning silently or not at all.

Mr. David Lidington (Aylesbury): On a point of order, Miss Widdecombe. As this is the first Treasury debate since the recess, I hope that you will agree that it is in order for me and my right hon. and hon. Friends on the Opposition Front-Bench Treasury team to express our sincere sympathy for the Chancellor of the Exchequer and Mrs. Brown on the tragic death of their baby daughter. I know that words are pitifully inadequate in such circumstances, but I hope that the Economic Secretary to the Treasury will accept that our condolences are felt widely throughout the House and that people of all political persuasions will want to keep the Chancellor and his wife in their thoughts and prayers.

The Chairman: I thank the hon. Gentleman for that statement. I am sure that it echoes the sentiments of the Committee.

I now call on the Economic Secretary to the Treasury to make her opening statement.

The Economic Secretary to the Treasury (Ruth Kelly): I am grateful for the Opposition's expression of sympathy. I am sure that my right hon. Friend the Chancellor of the Exchequer and Mrs. Brown will be grateful. We all feel their loss with heartfelt sorrow, and I assure the Committee that they will remain in our thoughts and prayers.

The purpose of the broad economic policy guidelines is to help ensure that the economic policies of member states are consistent with the goals of the treaty. Those goals include non-inflationary economic growth, respect for the environment, a high level of employment and social protection, and rising standards of living and quality of life. The guidelines form a central part of the process of multilateral surveillance in the European Union, and build on the other processes of EU multilateral surveillance, including the stability and growth pact.

The formal basis for the European Union's broad economic policy guidelines is set out in article 99 of the EC treaty, which states:

''The Council shall, acting by a qualified majority on a recommendation from the Commission, formulate a draft for the

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broad guidelines of the economic policies of the Member States and of the Community, and shall report its findings to the European Council.''

In accordance with article 99 of the treaty, ECOFIN adopted the 2001 broad economic policy guidelines for member states and the European Union at the Gothenburg European Council on 16 June 2001. Article 249 of the treaty makes it clear that the recommendations included in the broad economic policy guidelines are non-binding on member states. It provides that the

''recommendations and opinions shall have no binding force''.

The guidelines that we are debating today set out the Council's views on economic priorities for 2001 and provide the reference text for the Council and the Commission to review economic developments within the EU and member states. Although the 2001 guidelines were agreed by ECOFIN in June 2001, I am more than happy to participate in this debate, which was requested by the European Scrutiny Committee.

As I made clear in my original explanatory memorandum, the United Kingdom has been keen to develop the role of the broad economic policy guidelines. The Government believe that the 2001 guidelines reflect our main prioritiesin particular, promotion of the wider economic reform agenda. Indeed, it is essential that the broad economic policy guidelines fully reflect the importance of structural reform in tackling successfully the challenges of globalisation and competitiveness, promoting employment and social inclusion, and improving the performance of the European economies. We have also emphasised the importance of making those objectives sharper; of setting milestones for the implementation of reforms; of benchmarking good practice, and of developing structural reform indicators as a priority; and of putting those objectives into practice through policy.

The year 2000 saw high growth and falling unemployment in Europe. However, the period in 2001 that preceded the latest guidelines saw a markedly less favourable economic environment, with high oil prices, slowing global demand and an unexpected slowdown in economic activity in the United States, although growth in member states held up well.

There have been many significant developments in the economic situation since the guidelines were agreed in June, as the European Scrutiny Committee rightly recognised in its report of its discussions on my explanatory memorandum and the guidelines. I am sure that hon. Members are fully aware of those developments, so I will not dwell on them. Instead, I will focus on the strategy that underpins the guidelines.

The 2001 broad economic policy guidelines focus on the medium and long-term implications of structural policies, and on reforms aimed at promotion of economic growth potential, employment and social cohesion. They also focus on the transition towards a knowledge-based economy and policies for sustainable development. Against that, they concentrate on four key challenges for European policy, which are to preserve expansion in growth and

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jobs, to improve the basis for future growth and employment, to prepare for the impact of ageing populations and to ensure close policy co-ordination.

To achieve those aims, the guidelines make specific recommendations. They suggest ensuring growth-and-stability-oriented macro-economic policies, to position the economy on a sustained, higher non-inflationary growth and employment path. They recommend improving the quality and sustainability of public finances, maintaining sound budgetary positions and finding an appropriate balance between reducing public debt, cutting taxes and financing public investment. Labour markets should be invigorated, the guidelines say, to tackle problems of unemployment by addressing skills shortages, making structural improvements and increasing participation in the labour market, especially among women and older workers.

Further recommendations are: to ensure efficient product markets by increasing liberalisation of markets and reinforcing competition; to promote the efficiency and integration of the European Union financial services market, to allow an improved allocation and lower cost of capital in the EU; to encourage entrepreneurship, creating a more favourable environment for business needs in Europe; to foster a knowledge-based economy by establishing competitive and well functioning product and capital markets, increasing the use of ICT and strengthening education and training; and to enhance environmental sustainability to ensure the responsible use of scarce resources, by increasing the use of market-based instruments as a means to promote sustainable development.

The guidelines for 2001 have drawn significantly on the findings of the so-called implementation report that the Commission produced as a follow-up to the 2000 guidelines. The Government feel that that method of monitoring is an important step in consolidating the progress made to date, and it should help embed the notion of economic reform in Europe in the minds of all concerned.

The specific, albeit non-binding, recommendations that apply to the United Kingdom are also consistent with the Government's approach to economic policy. They especially emphasise the needs to maintain sound public finances, to reinforce measures targeted at those prone to the risk of long-term unemployment and inactivity, to address the relatively low level of productivity in the UK, to improve transport infrastructure and to encourage the role of pension funds in the development of the risk capital market. The general direction of the recommendations is in line with the Government's stated policy objectives, and measures taken since we came into office.

The UK Government made it clear that the Commission, in its recommendation for the 2001 broad economic policy guidelines, had exceeded its remit by proposing a UK-specific guideline stating that the expected ratio of UK public-sector current expenditure to gross domestic product should not

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exceed 37.3 per cent. The Government ensured that that reference was removed from the final broad economic guidelines; in its report on the 2001 guidelines, the European Scrutiny Committee welcomed that change. Decisions on the level of public spending in each member state and each Government's fiscal rules are for member states. The UK Government's fiscal rules ensure sound and sustainable public finances while enabling increased investment in priority public services.

The next round of multilateral surveillance is about to get under way, and will culminate in the formulation of the 2002 broad economic policy guidelines around the middle of the year. The UK is keen to play a constructive role in encouraging economic reform and participating fully in the important process of economic policy co-ordination.

I look forward to the debate.

The Chairman: We now have until 11.30 am for questions to the Minister. I remind hon. Members that such questions should be brief and one at a time. Hon. Members will have ample opportunity to ask several questions if they want to.

Mr. Lidington: Page 6 of the Council's recommendations contains a growth forecast for the eurozone countries of 2.75 per cent. for 2001-02. In view of what has happened since the guidelines were drawn up, does the Minister think that that forecast is still valid?

Ruth Kelly: Clearly, when the broad economic guidelines were drawn up it could not have been perceived that the economic climate would deteriorate considerably not only in the EU, but throughout the world and particularly in the United States. The guidelines recognise that the economic outlook may change, and they will be interpreted in that context. It would not be appropriate for me to give my personal forecast for growth in the EU, but I am pleased to say that our assessment of the UK's performance is that growth will be in the range of 2 to 2.5 per cent, so the outlook is cautiously optimistic. In the current uncertain climate, it is difficult to say with precision what the outcome will be, but the measures that we have taken to entrench sound public finances and to lower interest rates should give us a certain stability in this uncertain period.